WEAKNESSES

RISK ASSESSMENT

Growth dependent on the extractive industry

Economic activity is expected to be moderate in 2019, being driven by the performance of just one sector: the extractive industry. The Bisha mine (copper, zinc, gold) remains the main contributor to growth, and its acquisition by a Chinese company planning new exploration activities will delay the end of operations, which was initially scheduled for 2021. The Colluli potash mine will gradually take over from the Bisha facility, and assuming there are no further postponements, it will start production in 2019. Until now, the mining sector has been the only area attracting the country’s few foreign investments, most of which have come from China. However, the recent resumption of peaceful relations with Ethiopia opens up new opportunities by placing the country in a strategic position on the Horn of Africa. In this context, the United Arab Emirates (UAE) will start building an oil pipeline linking the Eritrean port of Assab on the Red Sea to the Ethiopian capital. DP World, a multinational port company from the UAE, is reportedly considering building infrastructure in Assab, as is Russia, with whom negotiations are underway on the construction of a logistics hub at one of Eritrea’s ports. However, private investment and the potential increase in cross-border trade are unlikely to have a significant impact on growth in the short term, since they remain constrained by the severe lack of infrastructure. Public investment in development does not look to be on the cards, as the government has not taken any official initiatives in this direction. In addition, the government’s dominant presence in other areas of activity will continue to hamper the development of the private sector. In a setting featuring an almost non-existent labour market, extreme poverty, and household dependence on a rudimentary agriculture sector plagued by frequent droughts, private consumption will remain sluggish. Inflation, meanwhile, is expected to stabilise at a high level, supported by elevated food prices.

Persistent deficits

In 2019, the government deficit could be slightly reduced as mining revenues hold up, coupled with a probable reduction in military spending following the end of the war with Ethiopia. Some of this expenditure could eventually be redirected towards rehabilitating roads and upgrading the port of Assab, as reportedly planned by the government. The deficit will continue to be financed by monetary creation, fuelling inflation. Although relations with the international community have improved very slightly, the country remains excluded from access to donor support, meaning that Eritrea’s substantial and mainly domestic public debt is not expected to benefit from relief under the HIPC initiative.

Turning to the external accounts, the current account deficit may increase as a result of the widening trade deficit. Exports, mainly of agricultural products and minerals, are expected to remain low, while the country remains dependent on imports of food, capital goods, which are increasing with construction projects, and oil, whose rising price will amplify the deterioration in the deficit. Monetary policy will continue to focus on maintaining the dollar peg of the nafka, which will remain overvalued given the lack of foreign exchange. This should maintain the gap between the official exchange rate and that of the parallel market.

A gradual return to the international scene

The political landscape is dominated by the Popular Front for Democracy and Justice, the only legally authorised party, which has been led by President Isaias Afwerki since 1993. The total absence of democracy and fundamental freedoms, along with the regime’s totalitarian excesses, are widely acknowledged and make Eritrea one of the most closed countries in the world.

However, in July 2018, the President signed a peace declaration with Ethiopian Prime Minister Abiy Ahmed, agreeing to end 20 years of war, reopen borders and restore trade, transport and telecommunications links between the two countries. Originally due to an armed conflict over disputed borders, the situation with Ethiopia, coupled with accusations over the funding of al-Shabab armed groups in Somalia, had excluded Eritrea from the international community and led to UN sanctions (arms embargo, travel bans, asset freeze). These sanctions were lifted in November 2018 by the UN Security Council to welcome the peace efforts made, which also extended to relations with Somalia, with the reopening of embassies in the respective capitals of the two countries, and Djibouti. Although these developments may restore investor confidence somewhat and represent Eritrea's first diplomatic steps forward, the country remains characterised by recurrent human rights violations, forced labour and indefinite periods of military service, as well as a wave of migration as people flee the regime. This will continue to hamper development. The business environment remains very poor, with Eritrea coming second-last in the World Bank's Doing Business ranking.